How Does MTM Reduce Counterparty Risk in Derivatives Trading?
MTM significantly reduces counterparty risk by ensuring that profits and losses are settled daily. This prevents the accumulation of large, unsecured liabilities between the contracting parties.
By settling daily, the exposure to any single counterparty's potential default is limited to the gains or losses incurred over the most recent settlement period.
Glossar
MTM
Valuation ⎊ Market-to-Market, or MTM, within cryptocurrency derivatives represents the continuous recalculation of the profit or loss on open positions based on real-time market prices, a practice critical for risk management and collateralization.
Counterparty Risk in Derivatives
Exposure ⎊ Counterparty risk in derivatives quantifies the potential financial loss incurred if the party on the opposite side of a contract defaults before settlement, failing to make required payments or deliver the underlying asset.